Can Liberal Radicalism And Quadratic Voting Solve Governance And Funding For Cryptocurrencies?

Besides providing the impetus for creation of another cryptocurrency, the 2016 hack of Decentralized Autonomous Organization (DAO), a human-less venture capital firm, also highlighted flawed governance models in cryptocurrencies. When faced with the choice of either freezing investor funds (and avoiding a blockchain split) or creating a hard fork with a new set of rules to return funds to investors, ethereum’s core developers opted for the fork as a solution.

In that sense, the system design for cryptocurrencies is not very different from that of modern economy where stakeholders with large holdings and vested interests are rewarded with disproportionate powers in governance. More troublingly, the fork was a demonstration of centralization of power: ethereum’s core developers took the decision without assessing its impact on retail investors.

Experiments involving governance in cryptocurrencies have revealed similar flaws since. Most involve some form of equitable distribution of tokens or voting powers based on staking (holding of large numbers of coins for prolonged periods of time). But these approaches perpetuate the original problems in that they allow core developers and large investors to set the future course of direction for cryptocurrencies while other stakeholders, such as retail investors, are shut out of the process.

But a group of researchers and ethereum cofounder Vitalik Buterin claim to have found a solution that is an improvement over existing governance models. The new system is called Liberal Radicalism (LR) and combines elements of political philosophy with quadratic voting. The proposal, which borrows ideas from E. Glen Wyl’s book on Radical Markets, is outlined in a recently-released paper. It comes amidst a time of rising rhetoric about inequality and the corrupting effect of money on politics. As such, its applications could go beyond governance models for cryptocurrencies to real world systems, such as campaign finance and funding journalism.

Understanding Quadratic Voting And Liberal Radicalism 

In its simplest description, quadratic voting does away with the one vote per person idea. Instead it assigns multiple votes to a single individual. The individual can choose to distribute these votes over multiple issues on the ballot or cast them in favor of a single issue that has a direct effect on them. The LR concept revises the idea for quadratic voting by making it necessary to purchase votes in cryptocurrencies. Voters pay a square of the number of their votes into a fund. After voting is complete, money is returned on a per capita basis. “The amount received by the project (is proportional to) the square of the sum of the square roots of contributions received,” the paper’s authors write. The cryptocurrency’s governing foundation is responsible for matching the donated amount.

What Are The Benefits Of Liberal Radicalism?

The LR system offers a couple of benefits over previous mechanisms.

First, it is a fundraising method that aligns with the decentralized principles of cryptocurrencies and blockchain. Such an arrangement amplifies small contributions, possibly, increasing their value and weightage in the overall scheme. Nonprofit foundations backing cryptocurrencies have already mopped up billions of dollars in market capitalization from cryptocurrency exchanges.

But the actual power to disburse those funds for future development ideas actually rests with individuals. Under the current arrangement, the one vote per person approach to decisions has skewed voting systems in favor of wealthy investors or nonprofit and academic institutions, who hold a majority of voting power.

Second, it enables funding of entrepreneurial ideas which are incipient or small and gets rid of free-riders (or people who benefit from system improvements without contributing much to it). The larger public is typically concerned with goods or ideas that affect a majority. Because of current voting mechanisms, the majority’s concerns can be swayed by a privileged and wealthy minority.

This can sideline votes of smaller communities, who may be more concerned about another initiative that directly affects them. Through purchase of enough number of votes to make their voices heard, they can ensure funding for their idea. Such a system will ensure that all improvement proposals in cryptocurrencies get attention and funding from developers. Everyone, thus, pays their way in the system and free-riders are eliminated.

Real World Applications

To be sure, the concept is not completely new. Matching funds by nonprofits or wealthy individuals is an example of a similar approach because a sponsor with capital amplifies small contributions. However, the paper’s authors argue that the ratio in which funds are distributed is random and lacks thoughtful design. “The LR mechanism can be seen as offering a coherent design that captures their central motivation in a mechanism that is (approximately) optimal from the perspective of economic theory,” they write. They argue that LR can be applied to clean up campaign finance. Campaign funds for presidential, state, and municipal elections are already matched from public coffers. But the criteria applied to match funds is arbitrary. According to the paper’s authors, applying liberal radicalism ratios will allow matching of funds that will boost contribution of small-time donors. According to them, the same mechanism also be used to fund journalism projects.

What Are Some Problems With LR?

The proposed and widespread uses apart, the system is not without its flaws. For starters, it is susceptible to manipulation through hacks of the technology system used to implement voting systems. Then there is the fact that it does not completely eliminate centralization. The onus of matching funds for causes that a small subset of population deeply cares about lies on governments and philanthropists. The array of choices for funding, therefore, becomes dependent on their interests and motives. It has also not been “tried in the wild” as Coindesk puts it. According to Zoë Hitzig, co-author of the paper, a potential collaboration with artists and designers may be in the works in order to make the concept of liberal radicalism and its technology “usable to a wide number of people.”